How many of your customers are classified as early-stage, growing, mature, or declining? And just as importantly, how could the answer impact the value of your company?
Twenty private equity groups that had recently acquired office equipment dealerships were asked what company information could have increased their bids. 16 of 20 gave a response that was shocking to many dealers: a breakdown of the customers currently occupying various phases of the customer lifecycle.
What’s so important about a comprehensive picture of every customer’s position in the lifecycle? To find the answer, let’s first look at the strengths and weaknesses of various stages of the customer lifecycle:
- Early-stage customers can represent a huge growth opportunity. But you also face elevated risk as early-stage companies are more likely to struggle
- Customers concentrated in the growth phase of the lifecycle can promise a tremendous boost in revenues. But it could also lead to revenues that appear “lumpy” if revenue growth cools off due to customer maturation without growth-stage replenishment
- Mature customers can mean a stable and reliable source of income. But too many may indicate that growth opportunities are lacking
- Customers or industries in decline, whether short-term or long-term, are an obvious concern. But they can also be an opportunity as they may be looking to transform their business models and need new ideas and technologies to get there
A look at the breakdown of business customers across the lifecycle can provide a quick read of the state of the business and help an investor gauge whether its best days are ahead or behind.
Depending on their goals, investors may prefer customers concentrated in certain stages. But often, they want to see a good balance across the lifecycle. If a dealer can show what percentage of their revenue spawns from each lifecycle stage, it can help an investor more accurately evaluate the revenue potential of the company. And if you can’t show this data, investors generally assume the worst.
If you can demonstrate that your revenue mix is coming from diverse lifecycle stages and industries, you can give investors confidence in revenue potential over a three-to-five-year horizon, which aligns well with the average financial buyer hold period.
“As the office technology industry evolves and reaches to more recurring revenue and value added IT-based services, it’s very important to know that their customer base can absorb that product evolution. Mature stage companies stuck in the click charge status quo are not an attractive investment for us.”
-Managing Investment Associate, MM Private Equity Firm
To maximize the value of your business – especially in times like these – it might be time to take inventory of your revenue diversification. And if you need to expand into new markets, industries, or business segments, LEAF can help.